A couple of weeks ago my partners and I hosted a meeting of our SaaS advisory board. This is one of our firm’s four advisory boards. I had written about the role of these boards and the value our firm and portfolio companies derive from our advisors’ insights, feedback and help. Our SaaS advisory board includes executives from SaaS application vendors, CIOs and CTOs of companies that are heavy users of SaaS applications, and leading SaaS consultants. One of the most interesting insights that came out of our meeting was that the Chief Marketing Officers (CMOs) are starting to drive the corporate application agenda. This is consistent with Laura McLellan’s position who in a recent Gartner webinarstated that by 2017 the CMO will spend more on IT than the CIO, as well as the conclusions presentedhere.
There are several reasons for the CMO’s emerging power:
The accelerating move from offline to online for commerce, entertainment, and socialization. The web with its various personas (desktop, social, mobile, local) is enabling corporations to finally become truly customer-centric, i.e., to understand the problems customers face and provide mutually advantageous solutions.
The big data that is collected from the various online and offline interactions between a consumer and a brand can now be utilized effectively through a new generation of analytic solutions that enable corporations to better target existing customers and prospects with the right message, at the right time through the right channel, as well as to assess the effectiveness of each message based on the resulting actions.
Through the consumerization of the enterprise we are seeing a new generation of easier to “consume” applications that don’t resemble the monoliths of the past but instead take their cues from mobile applications, i.e., task-specific pieces of functionality that are easy to install, learn and use effectively.
The cloud that is making acquisition and deployment of these next-generation applications easier and faster.
The new generation of marketing personnel, including CMOs, that is more analytical, data-driven and technology-savvy.
Today we are seeing marketing departments acquiring applications to address online advertising for brand development and direct response commerce, social and mobile marketing and commerce, and analytics. Having anticipated this trend, over the past several years Trident Capital has been investing in such applications and today our relevant portfolio includes the online advertising technology companies Turn, Exelate, Jiwire, Brightroll, Sojern, the social marketing and commerce applicationsExtole and 8thbridge, and the retail analytic applications company Pivotlink.
Though the opportunities may appear brilliant, based on our experiences with these portfolio companies we have learned that working with the marketing organization also presents several challenges:
There is little tolerance for long application-implementation periods, inappropriately functioning software and need for specialized personnel to operate these applications. Marketing departments want to see results quickly and, under today’s typical corporate budget environments, they don’t want to have to hire new people just so that they can use a new application.
Short period during which to demonstrate meaningful ROI. Marketing departments may be willing to evaluate several different applications but they will ultimately commit to the ones that give them quick time to value with sustainable and growing ROI.
Data is not always well organized and structured. This is area where most frequently application vendors see a big difference between working with the marketing and the IT departments. For marketing departments managing data and maintaining its quality are new tasks. This task becomes harder as the volume, velocity, complexity, and structure of customer data are increasing. Marketing application vendors must be prepared to help by providing appropriate services in this area and thus ensuring that the application’s time to value will be short.
Skills for data analysis for insight-generation are lacking. While marketing departments are becoming awash in data, they often don’t have the people who can effectively analyze this data. Again, the marketing application vendors need to step and fill the void by offering their own data analytics and insight generation services.
Shorter initial licensing contracts and smaller marketing campaigns. As they try to understand the value of the myriad of applications offered to them in order to implement their customer-centric strategies, marketing departments feel that they must first “get their feet wet.“ In most cases this approach results in application licensing contracts that initially are short-term (1-3 months), or in smaller-dollar (typically $10-50K) marketing campaigns.
Need sales people who can first speak the marketer’s language rather than IT’s language. Over the past 30 years we have trained a cadre of application sales people who are expert at interacting with IT organizations, speaking IT’s language. This was necessary because front- and back-office enterprise applications, regardless of who was using them, were mostly purchased by the IT organization. If the next generation of marketing application companies is to be successful, they will need to hire sales people who can interact with marketing executives.
The sales cycles for these applications are becoming longer and more complex (see also here). Before the final decision for the licensing of these applications is made, IT is now becoming involved, and will continue to do so. Though the CMO’s prominence is rising, don’t expect the CIO’s role in marketing technology decisions to disappear. Over the past year our relevant portfolio companies started to see CIOs participating in important procurement decisions involving solutions for the marketing department.
The application’s user experience must be tailored to the marketing department’s users. We are starting to see application developers creating user experiences that are more akin to the practices being established around consumer software, particularly PostPC consumer applications. To easily adopt the multitude of new applications offered to them, marketing departments must want to interact with them and must be able to do so easily and with little or, preferably, no training.
As corporations become more customer-centric and the move to online continues, data-driven marketing departments stand to reap big rewards. For this reason they are acquiring a new generation of applications to help them improve their interactions with customers and prospects regardless of channel. Marketing application vendors must understand this trend along with its positive and negative implications, as well as the evolving roles of CMOs and CIOs, in order to best capitalize on it.
About a week ago I hosted the second annual meeting of our
SaaS portfolio companies’ CEOs.Like last
year, we met in our office in Palo
Alto to share relevant experiences from the past
twelve months, and exchange ideas relating to sales, marketing and product
development initiatives.In addition to
our CEOs, I also invited David Spitz, MD at Pacific Crest to provide us with his
perspective on the public markets.Below
are the major points made during the meeting:
of the companies have established separate sales teams to acquire new
customers and to cultivate/expand existing customers.Our companies are starting to use of
Success Managers for customer cultivation/expansion.These individuals are part of the inside
sales team and become involved after a customer has been acquired and onboarded.Typically each Success Manager is
assigned 30-40 customers. The first goal of a Success Manager is to ensure
each customer uses the product correctly and gets the maximum benefit from
the product.In the process, the
Success Manager at the minimum assures that the customer will be willing
to renew the contract at the right time.More importantly, however, the Success Manager cultivates the
customer for an upgrade/upsell.
is a more concerted effort by our portfolio companies to further develop
the self-service channel in order to reduce sales costs.But, as SaaS is being aggressively
adopted by the Global 2000, our companies find it necessary to also
establish field sales teams.However, they require the field sales people to engage only if a
minimum deal size is established (typically $100K).
our CEOs eliminated his entire field sales effort but now regrets letting
the best of his field sales people go because he thinks that based on the
opportunities his company is pursuing, they would have been able to
perform very well even working as inside sales capacity.
sales process is becoming more complicated, particularly with larger
companies.Now our sales people
need to “sell” to more executives from different organizations within each
such prospective customer.
and frequently experimenting with different pricing and terms and
conditions is viewed as important by all CEOs.They believe that only through such
experimentation they can maximize the results of their sales efforts,
particularly in today’s market environment.
more effective than SEM for lead generation.In addition, emails combined with inside
sales outreach efforts are very effective for lead generation.Quick and frequent experimentation of
various approaches to lead generation is very important.
companies are not adequately leveraging social media in their lead generation
efforts.We have urged them to
start doing so.We pointed to the
fact that User Generated Content (UGC) is ranked higher by search engines.For this reason companies such be using
more UGC in their marketing efforts.The companies should also try to not only use the communities they
have started building but also partner communities.
comprehension of the SaaS model and market by the industry analysts is
improving by the month.The CEOs
mentioned the analyst firms they think “get” SaaS and the ones that remain
skeptical about the model.Interestingly, none of the participants considered any of the
analyst firms to be thought leaders
today in SaaS.They believe the
SaaS thought leaders are independents.
(David Spitz’s comments with additional commentary from our CEOs)
companies are benefiting disproportionately from the recovery, though not
all SaaS are performing in the same way.The public SaaS companies tracked by Pacific Crest demonstrated
strong growth over the past two quarters with companies either meeting or
exceeding their 1Q10 targets (as I had also written here).
growth is very important even if the company doesn’t generate much free
cashflow (FCF).But in general the
markets are looking at growth rate,
revenue, and FCF. Investment analysts are also
starting to pay close attention to the bookings of SaaS companies and to
the additional net new subscribers per reporting period.Investors are becoming savvier about
SaaS and are now able to analyze the relationship between Customer
Acquisition Cost (CAC) and customer Lifetime Value (LTV).However, it is unclear whether these metrics
really matter to corporate development executives looking into
acquisitions of SaaS companies in addition to the three metrics mentioned
above.Financial buyers, e.g.,
private equity firms, are also becoming interested in SaaS because of the
recurring revenue model.
private company financings are getting done, more acquisitions are being
contemplated, including some larger deals, and companies are more open to
filing to go public (with the strong encouragement of investment bankers).SaaS companies with at least 15-20% YoY
growth and at least $15M in Annual Recurring Revenue (ARR) are of
particular interest since they show that they can achieve scale.
On Friday my partners and I hosted in our office in Palo Alto a meeting with
the executives of our online advertising and ecommerce companies.Executives from Syndero, HomeAway, Zeo,
AccountNow, Advanced Payment Solutions, Turn, Sojern and Tellapal participated
in the meeting.The purpose of the daylong
meeting was to enable the participants to exchange information and best
practices for customer acquisition and improving lifetime value (LTV).Below are some of the major points that were
made during the day:
best in class on customer acquisition implies combining the right people, an efficient process, and best
in class tools.The process
typically being used involves: creating
a control group, hypothesizing a
particular behavior of this group that will be capitalized during the
marketing campaign, testing the
hypothesis on the desired customer touch points (email, search, display,
affiliates, etc.), analyzing the
test results, learning from the
analysis and optimizing, forming a new hypothesis, repeating.As one of the participating CEOs
mentioned “every minute, some aspect of a customer acquisition campaign is
media is becoming an increasingly important channel for generating
interest in a category but once a company starts promoting their
particular brand through the social channel, user engagement appears to
drop.Word of mouth is important
but it has not yet been integrated effectively with social media.This is an area that holds great promise
and where the participating companies will be investing over the next 12
and measure every parameter that goes into customer acquisition.Best in class companies can manage very
complex test matrices.It is
important to be able to quickly hypothesize and test offers, creative,
right analytics around the data being collected define best in class
companies with the lowest customer acquisition and retention numbers.Our portfolio companies, by constantly
sharing best practices, have moved beyond measuring the effectiveness of
customer acquisition campaigns in terms of clicks, and impressions, i.e.,
website analytics.Instead they are
now measuring the impact of each
customer interaction on a particular outcome.
companies are investing heavily on improving the quality and the uses of
the data they capture through their customer interactions, they were less
definitive about the impact of data they purchase from data exchanges.
off-the-shelf software platform for direct response/branded response
doesn’t exist (investment opportunity?).The portfolio companies have created such platforms by manually
integrating stand-alone applications.As a result, the operational complexity of working with multiple
applications rather than a single platform presents a big challenge for
marketers. Good direct response
software platforms can be used not only to improve the effectiveness of
customer acquisition and customer retention of existing products, but they
can also be used to effectively test the likely success of new products
before introducing them to the market.
with online channels is leading our ecommerce companies to start
experimenting with offline channels such as Direct Response TV.Every test associated with an online
customer acquisition campaign can become a leading indicating for the
effectiveness of a corresponding offline campaign.
companies are being proactive about data privacy issues.They are using services, including legal
services, on how to best safeguard and use the data they collect and what
to include in the creative they test for customer acquisition.
on how to calculate lifetime value per customer are still evolving.
Not only were the executives able to share best practices
and share ideas about how to improve the operations of their respective
companies, but after the meeting ended several stayed behind working on
business deals between their companies.A great way to end the week!
Last Thursday I moderated a panel discussion on sales process
and metrics for SaaS application software.The discussion, part of Dealmaker Media’s Strategy Series, was held at
our office in Palo Alto.We had 35 guests and 3 great panelists: Tom
Dibble, chief revenue officer at Aria Systems, Jon Miller, VP marketing at
Marketo, and David Vonk, SVP of sales and business development at
Pivotlink.My goal for the panel was to
explore the sales models that are getting the most traction in SaaS application
companies and to better understand the costs associated with the sale of SaaS applications.Some of major points that were made during
Sales organization. The panelists
indicated that they employ a two-tier
sales organization: an inside
sales group that is responsible for opportunities with ACV of up
$100K, and a field sales group that
is responsible for larger opportunities.In addition, all 3 companies have established a lead qualification group, working
between the sales and marketing groups, whose goal is to qualify the leads
generated by the marketing group. We couldn't get a good indication if and when it is necessary to split the sales into "hunters," i.e., sales people that are responsible for the acquisition of new customers, and "farmers," i.e., sales people that are responsible for renewals and upsells.
Lead generation channels.The sales teams are responsible for
generating 40-50% of the new leads with the rest of the leads generated by
the marketing group.The panelists
identified the following lead generation channels in order of efficiency: virtual trade shows because
participants have the opportunity to interact with peers and
simultaneously compare several vendors, online advertising, (SEM/SEO
and PPC) since the inbound inquiries the result in are better than the leads
generated through outbound calling, and social media outreach since word of mouth is becoming very
important for customer acquisition.The panelists also acknowledged the importance of educating
prospects by providing a variety of relevant and frequently updated
content on their companies’ web sites.Prospects must feel that they are receiving value from the vendor
even before they license the application.As one panelist put it “the prospect must feel they are getting
more value from your company’s web site than they feel they get through
The importance of acquiring branded
customers.Even though SaaS
companies tend to focus on the SMB market, the panelists admitted that
they try hard to acquire enterprise clients for two reasons.First, because they typically sign
contracts of higher ACV thus providing higher return on the vendor’s sales investment (cost per lead,
pre-sales personnel costs, partner referral costs, etc).Second, because of their brand recognition which aids overall
sales and often results in the reduction of the costs associated with the
acquisition of smaller customers.As one panelist said “while it’s important to have hundreds of SMB
clients, it’s even more important to have logos such as Nike, Coke and
P&G in your customer list.”
Measure the amount that each sale adds to the MRR.
the time to cash.Self
provisioning may work well in some cases but in general the panelists
found that it doesn’t shorten the time to cash.For this reason they found it important
to use post-sales services to expedite the customer on-boarding and
optimize the value the customer is receiving from the SaaS application.They advocate
productizing (or templetizing) the service delivery.
SMB prospects within 30 days.Prospects
that are not willing to sign a contract within this period typically are
not ready to buy.
license price of $1K/month and minimum contract term of 1 year.Other pricing and term models the
panelists tried (e.g., freemium, pay as you go subscription with no
minimum contract, etc) have not worked as well for the applications their companies are selling.Presumably they have also determined that the minimum license price and contract term allows them to recover the CAC. Make sure that the LTV can become larger than the CAC and adjust accordingly. These testimonials show why it is very important to align the expected Customer Acquisition Costs with the monetization strategy.
(less than 10% on 1-year contracts) or no discounting.It is easy to quickly demonstrate the
value of SaaS applications, often even during the pre-sales process.As a result, it is not necessary to
offer discounts in order to close a deal.By contrast, on-premise software vendors typically have to
discount heavily because the value associated with their applications
often comes several months (or even years) after the initial
The role of partners.The companies are now investing
aggressively around partners in order to grow faster than the overall
market and continue to reduce the customer acquisition and customer support costs.Marketo gets 20% of the
business today through partners.The panelists advised the participants to create a compelling
integration strategy between the vendor and its ISV and OEM partners, as
well as to try not to compete with the services channel partners.
We had a lot of fun hosting the event and were glad to see
the level of interaction between the panelists and the participants.We want the thank Dealmaker Media for their
efforts in making this event successful and look forward to hosting additional
such Strategy Series events.
previous posts I have written about various aspects of sales in SaaS models
including the importance of the collaboration between sales and marketing, the
role of inside sales operations, controlling customer acquisition costs, and
the role of self-service processes in sales and support. Today I briefly
wanted to touch upon business development. The management teams of young
SaaS companies that come to present to our firm often mention that upon raising
their round they will hire a business development executive to help them grow
channel sales. These companies tend to have 20-50 direct customers and
have raised either one institutional round of funding or are
bootstrapped. It always strikes me as odd that after acquiring only 20 or
so customers, management feels that they thoroughly understand their solution’s
direct sales process and the costs associated with this process to the point
where they feel ready starting on channel sales.
would have thought, and continue to hope, that the management of such early
stage companies would want to devote more resources in better understanding the
direct sales process associated with their solution so that they can optimize
it and reduce the costs associated with it, before embarking on creating and
optimizing the corresponding channel sales process. By the way, we
typically respond to such statements with a healthy dose of skepticism and
never make an investment decision in an early stage company whose primary
success must come from direct sales, based on the promised success of channel
sales. Our skepticism regarding channel sales is almost always validated
once we invest in such early stage companies. We usually find enough
immediate opportunities for improvement around the direct sales process that we
invariably delay the management team’s immediate plans to expand into channel
sales. I’ve recently read this post which summarizes so crisply the issues we have with
attempts by early companies to expand in channel sales that I thought of
sharing it along with my commentary.
The Magic Number provides an additional way to
evaluate whether the direct sales model is working and the startup is ready to
invest in the development of the channel. Will Price in his blog
posted the graph below which comes courtesy of Josh James, CEO of Omniture. The
graph correlates the magic number score to a company's growth stage. Don't try
to overanalyze it. Just another perspective around the type of attention that
needs to be paid around getting one sales model right before adding another
While the overall consumer economy continues to struggle, we have found
resilient performance in branded response marketing. Revenues for
Payment Solutions and Zeo , four branded response Trident portfolio companies,
are in aggregate up almost 60% year over year for the first half of 2009 and
are expected to continue their aggressive growth in the second half.
Branded response (for some additional discussion see here) is an evolution
in the concept of direct
response marketing . Similar to direct response, branded response
focuses on marketing efforts that drive specific, and quantifiable actions from
the target customer. In this way the marketer is able to evaluate the
effectiveness of the marketing dollars spent. In addition, through branded
response the marketer can simultaneously formulate and execute a brand
strategy. If executed well, a branded response campaign can quickly create a
large, loyal base of customers that generate recurring revenues and brand
AccountNow, a Trident portfolio company since 2007, has successfully built
its business leveraging branded response. The Company offers consumers a
prepaid debit card that effectively acts as a virtual bank account, allowing
consumers to deposit checks and get access to cash without using expensive
check cashing services. While the company builds its customer base primarily
through online channels, it is important that it is viewed as a strong
financial institution that its members can trust. This trust is centered around
the AccountNow brand. The customer’s positive association with this brand
increases usage of the product, which, in turn, drives revenues and
Branded response marketing ensures that marketing dollars are spent
efficiently and generate long term profitability. Advertisers who are
evaluating how to allocate their dollars are increasingly turning to online
advertising because of the ability to continually assess the ROI of their
spend. This drive towards accountability has only been sharpened by the
economic downturn. Corporations want to evaluate revenues generated from their
marketing campaigns and optimize their marketing spend by marketing initiative
and by media channel. While this level of detailed tracking is still in its
infancy in much of the online advertising market, it is at the core of branded
Branded response represents a very attractive and unique investment
opportunity. It enables a company to quickly make significant sales with
a relatively limited capital outlay and a moderate level of risk. Executing on
this model, however, is not as simple as it sounds. According to Brad Klaus,
the former CEO and cofounder of Trident portfolio company Syndero, “Branded
response marketing requires a unique skill set – the ability to combine
knowledge of online marketing, analytics, online commerce and consumer
products.” These skill sets must be applied to the reams of data that drive the
business model – and in order to do that, management teams must have best in
class data collection and analysis tools. “Having the right tools to help in
the decision making process is critical” says Tim Coltrell, CEO of AccountNow.
“Trident has been invaluable in helping us deploy best in class tools to
improve our sell through and customer retention rates as well as manage costs.”
Brad recently joined Trident as an entrepreneur in residence after helping to
grow Syndero at a CAGR of over 200% during the first four years. He will be
working with the Trident team to help discover and develop additional
opportunities in the space. Brad’s expertise as a successful entrepreneur as
well as his industry contacts as a board member of the Electronic Retailing
Association will be invaluable in helping Trident continue its successful track
record in the sector.
Branded response and, more generically the increased use of data analytics in
online marketing will also drive opportunities in the ecosystem of online
marketing and e-commerce. Trident’s online commerce companies such as Homeaway , Kayak , and
are adopting many of the same strategies for online customer acquisition that
companies like Syndero and AccountNow utilize. Other Trident portfolio
companies like Turn,
and Merchant e-Solutions provide tools to online retailers to
help them improve their customer acquisitions and online commerce.
Trident is leveraging its acquired expertise in this sector to help its
relevant portfolio companies adopt and apply best practices and them to success
the recession proceeds, analysis of business-to-consumer e-commerce sales data
shows that while the sector is not immune to the recession (2008 was the first
year that e-commerce did not grow on a YoY basis since 2000), it is growing
faster and is experiencing less margin pressure than physical retail.
Public companies like Amazon, Netflix, and GSI Commerce posted strong results
for 2008 and took market share from their competition. It has also been
reported that 2008 sales for the 131 online retailers have grown by 21 %
YoY. Excluding the top five e-retailers in this group the rest still grew
by about 10% during the same period. Anecdotal evidence, including data
from our own domestic and international ecommerce portfolio companies, suggests
that many private e-retailers enjoyed similar strong results. These
results can be attributed to customer behavior, investments made by merchants,
and decreasing customer acquisition costs.
these recessionary times consumers are using the Internet extensively to search
for deals (for example, Google, Yahoo and Microsoft report that searches around
online coupons are skyrocketing; a recent survey by JP Morgan reported that
price is today the most important factor when consumers choose an online
retailer), for comparison shopping as they attempt to identify the best
possible prices on the items they still buy, and for its overall convenience
factor. In addition, shopping sessions and amount sold per session are
growing on a YoY basis. Demographic data suggests that while younger
buyers still dominate, the use of ecommerce by older consumer groups is
rising. Finally, while ecommerce’s penetration in product categories such
as computer electronics, and media (books, music, and video) is over 25%,
penetration in categories such as cosmetics, apparel, home furnishings is still
less than 10%, implying that there is lots of room for growth.
these trends, retailers are investing more heavily around their ecommerce
infrastructure and merchandize choices (creating a virtuous cycle for the
further growth of their ecommerce sites), while curtailing investments in other
parts of their operations (including physical stores). These investments
in conjunction with continued broadband penetration, improving shipping
infrastructure and e-payment methods are expected to continue benefiting
e-retailers for years to come and further strengthen the consumer behaviors
are also benefiting from the drop of customer acquisition costs (online
advertising and lead acquisition). This is due to the drop in CPM and CPC rates
(in some categories more than others), as reported by Efficient Frontier, to
the availability of more online advertising inventory, and to the decreased
competition in keyword auctions. I expect that these trends will continue
during 2009 and possibly 2010.
A final reason for optimism on the short- and
longer-term growth of ecommerce companies comes from the increasing use of
analytics by e-retailers. Until recently ecommerce analytics were being
used consistently and effectively only by the leading e-retailers. In
most cases, these e-retailers had to develop proprietary analytic
applications. More recently, packaged software applications incorporating
analytics to understand consumer behavior within a site and across sites,
analytics that drive the optimization of a site’s content in order to improve
consumer response rates and merchandise turnover, keyword optimization to
improve online advertisement response rates to search queries, price
optimization to maximize profit margins based on customer purchasing behavior,
etc. are starting to be adopted by the broader group of e-retailers and are
leading to significant improvements in the performance of these companies.